IRA Transfer to 401k
Hi, I have a client w/ a Traditional IRA funded w/ after-tax contributions (none came from a rollover from previous employer). Can the client transfer this IRA into their current 401k plan? My understanding is that they cannot, but some colleagues told me that this is permissable as long is the Plan allows it.
Thank you.
Permalink Submitted by mk foss on Thu, 2012-12-20 23:52
No after-tax contributions can be accepted by the 401k plan. All of the earnings on those contributions CAN be transferred. Assume after tax ontribtions are $47k and the IRA has $55K. The $8k growth or earnings can be converted to a 401k – if that 401k accepts IRA transfers. The $47k could never be transferred to a qualifed plan.
Permalink Submitted by Alan - IRA critic on Thu, 2012-12-20 23:54
Yes, it is permissible as long as the 401k plan will accept IRA rollovers, but the transfer cannot include any IRA basis the client has correctly reported on Form 8606. Of course, the client would not want to transfer basis because when transferring the pre tax amount, client could convert what is left to a Roth IRA tax free. This all assumes that all clients TIRA accounts are considered combined into one account. In some cases it is better to complete the IRA to 401k rollover first and in others it is better to do the conversion first. Do the conversion first only if client is positive that the 401k will accept the IRA rollover before the end of the year. It is now probably too late to complete this in 2012. Once this is done, there should be an explanatory statement included with the tax return indicating what was done.